Eliminating fossil fuel subsidies and pricing carbon will create the financing necessary to build the new infrastructure necessary to reduce destructive climate change. Proceeds from the infrastructure can pay the looming future retirement outlays for an aging global population.

Reforms like this will create a multi-decade global economic boom. That, in turn, will generate the cash flows needed to fund an aging global population. It’s a virtuous circle.

Successfully solving the world’s two biggest current challenges — climate change and global aging — will determine what life is like in the second half of the 21st Century.

There’s no time to lose.

Some estimates peg the global retirement funding shortfall as already equal to the world’s current $80 trillion collective economy.

Meanwhile, the world is at a tipping point where storms, starvation and drought are going to hit harder and harder.

Infrastructure is now one of the most attractive places for long term investment.. Carbon markets, meanwhile, offer huge potential to generate the needed price signals to create the fortunes of tomorrow.

Together, carbon pricing and infrastructure investment can generate the cash flows needed to raise economic growth. Think of it as the Marshall Plan after World War II — but on steroids.

These initiatives are being pushed in different but largely supplementary ways by multilateral organization such as the Energy Charter Treaty,ASEAN+, the Asia-Pacific Economic Cooperation (APEC) Group and others.

For instance, the Energy Charter Treaty is working to develop common protocols for investment. Meanwhile, ASEAN+ and APEC are working to develop multilateral strategies for needed investment in generation and transmission infrastructure.

For their part, organizations like the Asian Infrastructure Investment Bank, the World Bank and the Asian Development Bank similarly are working on new financing models to pay for all this.

And on the unilateral level Japan, China, the US and the European Union are each developing the markets to properly price carbon and recycle the proceeds into investment.

Among the most promising current initiatives are efforts by the Group of 20 largest economies to eliminate distortionary fossil fuel subsidies by 2025.

Meanwhile, former US Treasury Secretary Larry Summers is among those who believe large-scale fiscal spending on infrastructure, particularly on energy and climate change, can boost global economic growth and lay firmer foundations for 21st Century global prosperity.

Key to his argument is that new investment in infrastructure can generate the long-term returns needed to pay looming retirement obligations.

The alternative, he notes, is for either a default on these obligations or a renegotiation downward of previously promised payments – which could be politically destabilizing.

In coming years, large financial write offs in the Liquid Natural Gas (LNG) industry are inevitable. The picture won’t be pretty. What follows will be, however.

By 2035, natural gas will be supplanted by hydrogen as an energy source. This begs the question: why would anyone now invest in natural gas?

In Asia alone, a quarter trillion dollars has been wasted to date building LNG export infrastructure to transport natural gas. The carbon emissions involved are high: from the methane produced in natural gas extraction to the compression and decompression of the natural gas into LNG for shipment.

The life cycle emissions of natural gas shipped to market as LNG is worse than coal. In coming years, carbon pricing and better energy technologies will expose and price these inefficiencies. LNG’s replacement will be hydrogen.

Asia at present has only a small and fragmented natural gas pipeline system but a large LNG infrastructure. Over time (to 2050) this LNG infrastructure will be replaced by pipeline and ocean shipping of hydrogen. This will occur through a retasked natural gas pipeline network coupled with sea-going hydrogen tankers.

This process is already underway. Constructive funding from the Asian Development Bank and the newly-created Asian Infrastructure Investment Bank can speed the process.

The place to see the future is Japan. Japan is the world’s largest LNG importer.

Japan’s moving away from long-term import contracts of LNG and toward spot trading of the commodity. This is shifting billions of dollars of price risk to LNG suppliers, hastening the end of the LNG import era.

The main impact will be a rapid end to the ‘Age of Gas,’ a nickname for a series of misguided forecasts that natural gas will become coal’s replacement as the dominant energy fuel through mid-century.

The place to see the future is Japan. Following the disastrous Fukushima nuclear accident, Japan is moving toward cleaner, safer energy alternatives. Japan now holds a global technology lead in the shift toward a hydrogen economy.

In hosting the 2020 Olympics, the city of Tokyo plans to power much of the games by hydrogen. Tokyo’s Metropolitan Government already runs one of the world’s most successful, well-designed carbon markets. It yields roughly US$80 million a year through pricing municipal carbon emissions at about US$38 per tonne.

These carbon levies will help pay nearly a quarter of the costs of building the Games’ hydrogen infrastructure, demonstrating the synergistic benefits of using both taxation and investment to make the shift to a clean energy future.

The hydrogen will be produced by carbon capture and storage-equipped coal fired power plants in the southern state of Victoria. Hydrogen exports made from solar energy in Australia’s Northwest may follow.

In the regional city of Kobe, Japan has a sewage plant producing hydrogen from human sewage. Japan’s also engaged in world-leading research creating hydrogen from green algae.

All this hydrogen can (among other things) serve an expanding fleet of hydrogen vehicles, which Japan’s also developing. Over time investment in large-scale, combined hydrogen and electricity infrastructure will simultaneously increase global economic growth and reduce destructive climate change.

As this occurs, development of hydrogen supply and demand will begin reinforce each other and the technology will rapidly spread. China, for instance, is now building railway lines from the southern Chinese city of Kunming to Singapore. Electricity power lines and hydrogen gas pipelines can be laid alongside.

Over time, Singapore can become a hydrogen market clearing center for the region. Hydrogen stored up and down the region can eliminate shortages and maintain stable pricing.

As the world grapples with slow growth, an aging population, big ideas are needed. China has a $4 trillion hoard of US dollar reserves earning low interest. China can recycle this money into export infrastructure projects for hydrogen production and delivery.

Carbon pricing’s lost decade and half (2006-2020) will cost the world dearly.

In 2006, some of the earliest traded carbon prices (in the early days of the European Union Emissions Trading Scheme) reached US $36 dollars. That price is around the level experts argue is needed to reduce climate change to manageable proportions by 2050.

Unfortunately, since 2006 prices have gone in the other direction. Most now linger well below $10.

The problem is due to too many carbon emission permits. Market reforms planned for around 2020 may fix this in part, by reducing the number of permits in circulation or creating floors below which prices can’t fall.

At best, it all means a ‘lost decade’ in reducing destructive climate change. This will negatively affect the quality of life on the planet for the rest of the century. What’s desperately needed is transparent, predictable pricing upon which to base future investment plans.

Forecast Carbon Market Prices to 2050

Overallocation of carbon emission permits has caused prices to fall. Restriction of supply and annually-escalating minimum prices after 2020 will bring carbon markets back to life. As this occurs, it will generate the funds needed to invest in clean energy.Sources: Carbon Pulse, RGGI, State of California, Synapse, US GAO, ICIS, Energy Aspects

This 15-year carbon price sleepwalk represents a lost decade and half. During this time, escalating carbon prices could have been progressively decarbonizing the world economy, paying dividends by now.

This would have included faster economic growth and greater accumulation of needed savings to meet the health care and retirement needs of an aging global population.

The US General Accounting Office has estimated the ‘social cost’ of carbon of around US$20, a figure private industry largely agrees with. The sooner this prices achieved, the sooner the financial system can play its role shift funds from fossil fuels to cleaner energy sources.

Had 2008’s $36 carbon prices persisted,the world economy might not now be stuck in a slow-growth phase.

The reason is that carbon prices and elimination of carbon subsidies would have fueled a huge investment boom. This would be paying dividends by now. These would include lower health and insurance costs from air pollution and less severe storms.

At $5.3 trillion, global fossil fuel subsidies now amount to 6.6% of the global economy, or US$132 per tonne, and are increasing by 9% per year. Source: “How Large Are Global Energy Subsidies?,” IMF Working Paper, May 2015

Instead, perverse pricing is perpetuating the problem. At present, fossil fuel subsidies amount to $213 per tonne of carbon.

Carbon Subsidies

Total

Per Tonne

Fossil Fuel Subsidies (US$ millions)

$5,300

$133

Health Impacts (US$ Millions)

$3,200

$80

Total

$8,500

$213

Taken together, fossil fuel subsidies and the health impacts
of climate amount to roughly $8.5 trillion dollars, or about 10% of
the global economy.
Source: “How Large Are Global Energy Subsidies?,”
IMF Working Paper,May 2015

Better carbon markets, fiscal reform, financial and technical innovation. That’s the solution. Undertaking these reforms, the sooner the better, will set the stage for a long economic boom that can solve many of the world’s problems.